Onshore accidents add to scrutiny for Houston industry

Published 5:30 am, Monday, June 14, 2010

A string of accidents this month at natural gas operations on land could not have come at a worse time for Houston’s vast energy industry.

With BP’s massive oil spill already prompting questions about the safety of offshore drilling in deep waters, a key growth area for the sector in recent years, the natural gas accidents are bringing new scrutiny to a business that may be even more important to the local oil and gas economy.

The incidents include two well accidents in the Marcellus Shale play in the Northeast U.S. that have reinforced regional concerns about gas drilling. Last week, two fatal gas pipeline accidents in North Texas also focused public attention on dangers associated with infrastructure used to transport the fossil fuel.

It’s not clear whether those incidents will draw onshore gas operations into the push for tighter regulation that the offshore industry already is facing amid the unfolding disaster in the Gulf of Mexico.

But they do represent another setback for an industry desperate to repair its image and to reassure Americans that domestic oil and gas resources can be developed safely.

Greater scrutiny on land-based natural gas operations comes as offshore drilling practices are already under the microscope. In late May, federal regulators announced a six-month ban on deep-water drilling in the Gulf of Mexico.

That was in response to the April 20 blowout at BP’s Macondo well in mile-deep waters off the Louisiana coast that killed 11 workers aboard the Deepwater Horizon drilling rig and started the biggest oil spill in U.S. history.

Government action has idled 33 rigs currently permitted to drill in the deep-water Gulf, which could result in tens of thousands of job losses across the Gulf region, say industry groups.

In Houston, the impact of the ban, along with temporary delays in shallow-water drilling, could cost 25,000 to 80,000 jobs, said Lee Hunt, president of the International Association of Drilling Contractors.

Recent accidents

No one is predicting that kind of fallout from the recent slate of onshore accidents, but they haven’t gone unnoticed either.

In Texas last week, two people were killed and three injured after a natural gas pipeline owned by DCP Midstream Partners exploded near the town of Darrouzett when a bulldozer accidentally hit it.

The day before, one person died when a power line contractor inadvertently struck a pipeline near Cleburne that was partly owned by Houston’s Enterprise Products Partners LP.

Elsewhere, a fire raged for five days last week at a rig near Moundsville, W.Va., after workers hit a pocket of methane while drilling for natural gas in the Marcellus Shale. Seven were injured, and state officials cited the permit holder, AB Resources, for not following submitted well plans.

Also, Houston’s EOG Resources was ordered by Pennsylvania officials to halt all drilling in the state after a June 3 blowout spewed natural gas and chemicals out of a well for 16 hours before it was secured. The state has since allowed the firm to resume some drilling.

‘Accelerated’ concerns

Prior to that incident, concerns about offshore drilling safety were already starting to transfer to the onshore realm, but the EOG blowout “appears to have accelerated this trend,” wrote Kevin Book, industry analyst with Clearview Energy Partners, in a report last week.

Indeed, a handful of federal lawmakers are moving forward with bills to place greater restrictions on a drilling technique called hydraulic fracturing, and environmental groups are seeing an opening.

“It just demonstrates that we’re at a point where the extraction of fossil fuels is very risky, whether it’s deep-well drilling under the ocean or hydraulic fracturing, that our dependence on fossil fuels comes with some significant risks,” said Larisa Ruoff, with Green Century Capital Management, a Boston-based investment advisory firm. The firm is trying, through shareholder proposals, to push oil and gas companies to disclose more about risks associated with hydraulic fracturing.

While proponents say hydraulic fracturing has been key in unlocking dense shale rock formations that have greatly boosted U.S. natural gas supplies, critics have raised concerns about the millions of gallons of water required to fracture each shale gas well and about possible contamination of groundwater supplies by chemicals injected into the rock.

Effect in Houston

If new regulation arises, Houston undoubtedly will feel it.

The city’s energy industry is full of small and mid-sized exploration and production companies, as well as larger players, that have made big bets on shale gas. They, in turn, support hundreds of other service providers and equipment makers with headquarters here.

The fear in the natural gas industry is that the latest string of onshore accidents will erase momentum it had made in building support for natural gas as a clean, abundant alternative to crude oil.

“These kinds of events give environmentalists a mail-order funding cause,” said Porter Bennett, CEO of Bentek Energy, an energy market research firm in Evergreen, Colo. “That’s not a good thing from the gas industry’s standpoint.”

But Aubrey McClendon, CEO of Chesapeake Energy Corp., the nation’s second-largest natural gas producer, said while the recent accidents are regrettable, he doesn’t believe they will have a meaningful impact on the industry.

“You want to have no accidents ever, but as long as humans are involved and you’re dealing with great unknowns underneath the earth, you’re going to have some surprising things happen,” he said.

“The question is what do you do with it? If BP had been able to control that spill in a day, we wouldn’t be talking about the BP incident today.”